Netflix Looks Toward Original Content, Competition With HBO Go

Company Can Win Future of TV Despite Recent Debacle, Hastings Says

Despite its recent stumbles, Netflix has as good a chance as anyone to win the jump-ball for the future of TV, CEO Reed Hastings said Tuesday.

"If you believe internet video is going to change the world in the next 20 years, we are the leading play on that ," he told the annual UBS Media and Communications conference in New York. "There is a huge, global addressable market for Netflix, as long as we don't shoot ourselves in the foot anymore."

Mr. Hastings was referring to the debacle last fall when he raised prices and tried to separate the company's growing streaming-video business from its legacy DVD mail order business, which was to be renamed Qwikster. Consumer backlash was quick. Netflix back-pedaled on splitting the businesses, but still lost 800,000 subscribers in the third quarter.

"We had done so many difficult things and I think we got overconfident," he said. "Our big obsession of the year was, 'Let's not live and die by the DVD.'"

But Mr. Hasting says that gaffe will be forgotten if Netflix can win the longer war for internet-delivered, on-demand TV. By 2016, he estimated that over half of all TV would be internet-delivered and "broadcast TV will decline like landline telephony." Potential and real entrants into the streaming market include Amazon, Verizon, Microsoft's Xbox, Apple and even Google, but Mr. Hastings said Netflix's only serious competitor today is HBO, which competes for consumer spending and, increasingly, for the rights to premium content.

"The competitor we fear most is HBO Go," he said, referring to the Time Warner premium network's streaming business. "They have a lot of content and a gilded brand. HBO is becoming more Netflix-like and we are becoming more HBO-like."

The competition isn't direct. In good times, many consumers subscribe to HBO (a prerequisite for getting HBO Go) as well as Netflix. In bad times, some may cut back and only subscribe to one. Both companies are spending huge amounts on content.

"HBO and Netflix both spend between $1 billion and $2 billion on content a year," Mr. Hastings said. "If you are not willing to spend at those levels, it is going to be pretty hard to compete with us or with HBO."

A growing percentage of that money will go to licensing exclusive or original content, a strategy that HBO embraced long ago. Mr. Hastings said that 5% to 15% of Netflix's content spending going forward would go toward original shows, such as "House of Cards," a David Fincher series in production, or the revival of "Arrested Development," the cult hit cancelled by Fox six years ago.

But he said spending on content acquisition would be driven by data from Netflix's 24 million subscribers. "We are very much the 'Moneyball' of content acquirers," he said.

All of this represents a win for movie and TV producers, Mr. Hastings said. "We need more money in the ecosystem driving money to content," he said. "Now we are an active bidder. It drives pricing for output up -- which is great for content producers."

Netflix's priority in 2012 is global expansion, a bid to make the leap to licensing studio content on a global basis, according to Mr. Hastings. "It's our 10-year ambition to pull this off," he said. "The internet is the world's first global distribution medium. YouTube is a global brand. So is Facebook. This is natural on the internet."

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Michael Learmonth

Michael covers the intersection of technology, media and marketing, including Google, Facebook, Twitter and AOL. He edits the Digital section of AdAge.com and oversees editions of Ad Age's Digital Conference in New York and San Francisco. He joined Advertising Age in 2008 after working at Silicon Alley Insider, Variety, Reuters and The Industry Standard.